Mergers and Acquisitions: all you need to know in a nutshell

Mergers and acquisitions have been very popular terms in the corporate world for decades now. We have all come across various examples of both, either in the news or from some other source. It is a form of showcasing power, growth, and market share.

Though a lot goes into mergers and acquisitions, a common sense of direction is what drives the success of a coalition. Deals can go horribly wrong when either or both the parties neglect any factor disrupting the direction towards a healthy future.

In this article, we shall take an overall look at what a merger and acquisition is, along with the reasons for companies to opt for them and the factors to look into when considering such a coalition. By the end of this article, you will understand, through some examples, the difference between a successful and disastrous mergers and acquisitions.

Let us begin with understanding what mergers and acquisitions are.

Mergers

When two companies pool their resources (financial, human, technological and product-line) to emerge as a single entity, we call it a merger.

Mergers take place at a larger scale. Here two (or more) giant-sized companies come together to increase overall market share and effectively increase their product-line. This combination of resources gives the companies a boost, by allowing them to tap into the strengths of the other and fill in the gaps of their own. Mergers are generally backed by a mutual intent to expand, rather than consolidation.

A tricky domain to navigate, mergers require a lot of due diligence from the parties involved.

Kraft and Heinz merger has been one of the most famous ones in the food industry, despite its messy deal. Prior to signing the deal, both companies were giants in their own rights. The merger was expected to boost their market share by leaps and bounds. But that was not the case.

Why is it done?

Mergers are done for three main reasons:

1. Increase market share for both parties involved, by playing into the strengths and brand visibility of each,
2. Boost the product or service line-up of both companies, with the new entity having a higher probability of sales
3. Fill in the gaps, without having to invest time into setting them up from scratch.

Acquisitions

When one company buys another company, it is considered an acquisition. The ‘acquired’ company no longer holds its brand name (unless stated otherwise) and becomes a part of the buyer company.

In simple terms, there is a seller and a buyer. The seller is interested in selling the company and the buyer assesses whether or not it is beneficial to buy the company. If the deal goes through, the buyer takes the sold company into its umbrella.

Acquisitions are more prevalent than mergers, simply because of the nature of their structuring. Many large companies opt to acquire smaller companies as a tactic to expand themselves.

We will get to the reasons for acquisitions in a moment, but first let us look at the two types of acquisitions:

1. Sale of Equity – when the seller only sells its stake in the company, without actually selling the assets individually. In this case, the buyer gains the equity and thus has the control over the assets of the company, depending on the percentage of stake it possesses.
2. Sale of Business – in this case, the seller sells the entire company to the buyer, including all the assets held. The ownership is essentially transferred here, and the buyer has direct control over the assets of the company. An excellent example would be the exit of a start-up, when it is acquired by a larger company.

Facebook (now Meta) acquiring WhatsApp was questioned by a lot of “experts” at the time in 2014. But this acquisition of a smaller company (WhatsApp) by a much larger company (Facebook) was a classic example of expanding the product-line and gaining set customer base to grow upon.

Why is it done?

Acquisitions, in some respects, are done for the reasons similar to mergers. But the reasons that vary are as follows:

1. Seller wants to exit the operations
2. New market entry is a major reason for companies to acquire smaller players in the markets they wish to enter. With such a move, barriers to entry are avoided and the parent company finds itself in possession of a pre-set consumer-base.
3. Expansion of product or service line-up is another reason for companies to consider an acquisition. Setting up a new division, technology or product-line is time consuming. In a trade-off between time and money, many companies choose the former and invest the latter into acquiring a company which fulfils that need.

How do Mergers and Acquisitions happen?

• Whether a merger or an acquisition, it will require at least two parties (for obvious reasons).
• Once the intention has been set, an investment banker is brought on board to evaluate the potential buyers/sellers. The investment banker helps the company scope for players according to the intent of the company. They sign the non-disclosure and confidentiality agreements with potential candidates, to allow them to see the rest of the deal. Further, they also help market the interests and intentions of the company. Investment bankers generally charge a commission based on the entirety of the deal.
• After shortlisting, the company (in most successful cases) bring on a consulting firm, whose purpose is to analyse the feasibility of the deal with the shortlisted companies. Based on these evaluations, the company chooses its best option. The consulting firm charges either based on the project, or a commission on the entirety of the project, similar to the investment banker. But their job isn’t done yet, and we shall come back to them later.
• Now it is time to structure the deal. This is where corporate lawyers step in. Their job is to structure the deal in the best manner that suits their client. This is where they are to work in tandem with the consultants, to factor in all the variables of the integration of the two entities. Finally, the deal is structured, presented and signed by both parties.
• Here we come back to the consultants, whose second task begins as a post-merger or post-acquisition integration. This is where all the assets, liabilities and resources are to be integrated smoothly, without disrupting the day-to-day operations.
• The emerged company now conducts operations as a single entity.

Check out what we do as Merger and Acquisition Consultants.

Factors to consider during Mergers and Acquisitions

1. Market conditions: it is advised to analyse the existing market conditions and try estimating the future projections of the market. This also includes entry of new players and products/services which could impact the value of the deal.
2. Financial stability: one of the most important factors to consider in the case of mergers. Many companies opt for mergers when they are financially unstable but show a confident front to avoid being acquired and/or losing their brand name. It is very important for the investment banker, consulting firm and the lawyers to carry out due diligence at each stage, to ensure nothing is missed out. Overpaying and underpaying, both are a reality.
3. Cultural match: AOL and Time Warner serve as the best example for a cultural mis-match. The deal saw a sharp decline in its value post-merger. Differences in culture and workplace ethics can cause severe problems while attempting to integrate the workforces and aligning tasks and roles for the new entity.
4. Integration foresight: integration is categorised into two parts – soft (people, performance, HR) and technological (CRM, ERP, IT, etc). The feasibility of the integration is important information to have, beforehand, to know the time and money to be invested in the process.

History has always had proof of mergers and acquisitions. Turning the pages of history, kingdoms would merge to consolidate armies. In some cases, one would acquire another in battle or negotiations. The legalities and the research behind the feasibility may have advanced, but the objectives remain (and shall continue to remain) the same. Being among the primary techniques of growth, each year in the future of mergers and acquisitions only seems to out-perform the previous years. With the total value of mergers and acquisitions in 2022, so far, standing at $2.6 trillion, we await anxiously for the megalithic number at the end of the year.

What do you think should be the next big merger or acquisition, and in which industry? Let us know in the comments below.